Alan Greenspan in his February 15, 2006, report to Congress stated that the current savings rate in the U.S. is 1.4 %, the lowest since 1938. He went on to say that people were relying on the growth of the equity in their homes to increase their net worth. But much of this equity is being borrowed out as homeowners use their home equity as an ATM machine to finance other large purchases, according to Greenspan. This issue was reinforced by a lead article on October 2, 2006, in the Wall Street Journal which pointed out that home equities are being borrowed out at the rate of $497 billion per year.
The forgoing has not escaped the notice of bank regulators, who have expressed concern that as home values have started to drop, aggressive banks may have overextended their home loans and may face a substantial increase in foreclosure.
I also wonder if all this is not an unintended result of the tax reform act a few years ago when the personal interest deduction was eliminated. The availability of an interest deduction on home and home equity loans is obviously providing an incentive for people to collateralize personal loans with their home. The home is a place where one should build equity for future use – not to fuel expensive spending habits today. Much concern is being raised about the difficulties of facing retirement with insufficient income. A home debt free should be a critical goal for retirees–not one hocked to the gills.
Despite all of the attention given to the subject of financial planning, and despite tax incentives such as IRA’S, 401(K)’s and other tax favored plans, not much has been done to increase our savings rate.
Perhaps a couple of observations may help to explain this. For one thing, it seems to me that most of the people giving financial advice are targeting people who have already accumulated significant wealth. Some financial services, in their ads, make it clear that they are only interested in offering their services to people with marketable net assets of $1 million to $3 million. New people coming into our business are required in most cases to obtain some very sophisticated licenses. Naturally, they want to work in the area where those licenses are required: the top of the economic pyramid. Nobody is paying attention to the broader market down from the top of the pyramid–and these are the people who need help the most.
The gold rush mentality, which led us to the stock market bubble and staggering losses and now to a potential housing bubble, is not a reliable road to wealth accumulation. A disciplined routine of savings, while slower, is a much surer way to acquire financial security when you have no base to start from–the condition of most people. So the question is, “How do I accumulate enough assets to become attractive, as a client, to those selling financial advice?”